Italy’s recession raises concerns of eurozone contagion

Italy’s economy has entered a recession after posting a contraction of 0.2 percent in gross domestic product (GDP) in the final three months of 2018. This follows a 0.1 percent negative growth in the previous quarter.

The Italian coalition government of the anti-establishment Five Star Movement, and the far-right League party, had promised to stimulate GDP growth when they took office in March last year.

The government has recently been involved in a standoff with the European Commission after their new national budget gave a budget deficit of 2.4 percent of GDP, in violation of EU rules. In December, the EU and Italy announced an amended budget seeing the deficit reduced to 2.04 percent of GDP, with the inclusion of some, if not all, of the government’s pledges such as a citizen’s wage to lower income families and tax cuts to self-employed individuals.

Guiseppe Conte, the Italian Prime Minister, blames the recession on the impact of the escalating US-China trade war, while Deputy Prime Minister Luigi Di Maio said that the recession was proof that the EU should relax its budget policy to allow Italy to stimulate economic growth.

Italy is faced with deep economic problems. With a youth unemployment rate of 30 percent and rapidly increasing government debt, the EU is watching Italy with concern. The European Central Bank published figures recently showing that Italy’s public debt is estimated at $2.6 trillion USD, which is 131 percent of its GDP. This is twice the EU limit and the second highest of all EU members. If Italy were to default on its debt, the subsequent crisis would hit the global banking system, and some economists say that a bailout deal would be relatively unfeasible due to the size of the Italian debt. During the previous eurozone crisis, the ECB and International Monetary Fund agreed on a bailout fund to Greece of $300 billion to cover some of the country’s deficit, but this is insignificant compared to Italy.

EU statistics agency Eurostat has reported that the eurozone as a whole is seeing a slowdown in growth. The region’s GDP grew at only 0.2 percent for the final quarter of 2018, and the year as a whole saw growth of 1.8 percent, the lowest since 2014. Germany, the largest eurozone economy, reported a contraction in the third quarter of 2018, which was blamed on changes to EU emission standards and a reducing export market for cars in China.